APRA increases capital requirements
(21 July 2015 – Australia) The Australian Prudential Regulation Authority (APRA) announced on 20 July, an increase in the amount of capital required for banks.
This change will mean that, for authorised deposit-taking institutions (ADIs) accredited to use the internal ratings-based (IRB) approach, the average risk weight on Australian residential mortgage exposures will increase from around16 percent to at least 25 percent.
The increase in IRB mortgage risk weights addresses a recommendation of the Financial System Inquiry (FSI) that APRA ‘raise the average IRB mortgage risk weight to narrow the difference between average mortgage risk weights for ADIs using IRB risk weight models and those using standardised risk weights’.
The increase is also consistent with the direction of work being undertaken by the Basel Committee on changes to the global capital adequacy framework for banks.
The increased IRB risk weights will apply to all Australian residential mortgages, other than lending to small businesses secured by residential mortgage.
APRA said in a statement the increase is being implemented through an adjustment to the correlation factor used in the IRB mortgage risk weight function for each affected ADI.
In order to provide these ADIs sufficient time to prepare for the change, the higher risk weights will come into effect from 1 July 2016.
“The residential mortgage portfolio is the largest credit portfolio for ADIs and, in aggregate, IRB accredited ADIs hold the material share of these exposures.
“Therefore, strengthening the capital adequacy requirement for residential mortgage exposures under the IRB approach will enhance the resilience of IRB-accredited ADIs and the broader financial system,” the statement said.
The increase in IRB mortgage risk weights is an interim measure.
It is not possible to settle on the final calibration between the IRB and standardised mortgage risk weights until changes arising from the Basel Committee’s broader review of this framework are complete, which should be at the end of 2015.
Further changes to IRB mortgage risk weights will be considered over the medium term in the context of these broader international developments.
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